http://inequality.org/dsouzafr.html The Lottery of Success By Dinesh D'Souza A hedged defense of today's economic arrangements, including the new inequality. Excerpted from his book The Virtue of Prosperity: Finding Values in an Age of Techno-Affluence (Free Press, 2000). "MERIT IS A very funny word," says Eric Schmidt, CEO of the software company Novell. "I'm not sure I entirely understand what it means." Formerly chief technical officer at Sun Microsystems, where he helped develop the Java programming language, the gawky, bespectacled Schmidt is widely regarded as one of the most thoughtful executives in the high-tech world. We are eating lunch at the Ritz Carlton hotel in Atlanta. "Who said that life is fair?" Schmidt says to me. "Who says that we get what we deserve? I didn't set out to make money or become rich. I did my job because I liked it, and the money showed up afterward. Suddenly I woke up and said: 'Oh wow, I'm not middle-class anymore.' But I can't say I have a moral right to this wealth. In a sense, it's a complete accident in my life. And if it went away that would be OK too." Schmidt's annual salary is $1.2 million, which barely qualifies him as rich, but when you factor in total compensation, it adds up to a cool $7 million. I bring Schmidt back to the issue of merit or just desserts. In what sense, I ask, can tech millionaires be said to deserve their fortunes? "It is undoubtedly true that the vast majority of people in the high-tech world have made their own money," Schmidt says. "Inherited wealth is simply irrelevant. We're talking about wealth that didn't even exist a decade ago, in some cases five years ago." "Another factor that's a lot less important is discrimination. By discrimination I mean the notion that you don't get the job because of the color of your skin. I'm not saying that doesn't exist, but it's rare. The most important question is not who you are or what you look like, but what you can do. And that seems to be a big change from a few decades ago, when the world was a wonderful place, as long as you were white and male." But what about the people who are left out of the high-tech universe? Schmidt says he's concerned about the "digital divide"--rich people can take advantage of the Internet better than poor people; whites can use it to increase their lead over blacks. These are group differences, but there are, of course, large differences in computer literacy among individuals as well. The problem isn't access, Schmidt admits, it's that "some people know what to do with the technology and others don't. So the Internet may end up increasing inequality because the skills that are needed to take advantage of it are unequally distributed." The New Economy, Schmidt argues, is heavily biased in favor of technology, and that success in that fast-growing sector requires a specific set of technical skills. That doesn't mean the old virtues--general intelligence, drive, hard work, reliability, and so on--don't matter. They're helpful, but they aren't sufficient. "Intelligence and drive have always been basic requirements for success in this country," Schmidt says. "What's different today is that it's getting harder to succeed if you are not extremely well educated, if you don't have the right degrees, preferably from the right universities." Why the right universities? "Because colleges like Harvard and MIT and Stanford are part of a social network. You can be a brilliant entrepreneur, but if you go to a no-name school you don't have access to these networks. Take my word for it, the networks count for a lot in this industry. I have been reading in the business magazines that anybody can raise venture capital for an Internet company. Yeah, right. Anybody can raise capital for an Internet company if they know the same guys that I do." Notice, however, Schmidt's concentration on the networking and social relationships these elite universities offer, not the education as such. If intelligence is measured in the Ivy League sense, it must be conceded that entrepreneurs are not, in general, very smart people. It's not just that they say unsophisticated things or that they don't know in which century the French Revolution occurred or that Max Weber's name is pronounced with a V. Ivy League graduates, to be sure, rarely make such gaffes. The mode of thinking that many of us associate with intelligence, however--a broad background knowledge of the world, a curiosity about one's place in space and in time, an ability to formulate ideas and arguments, a capacity to anticipate and understand objections, and a facility for articulating positions and responding to criticism--is not widely found even among top business leaders. ENTREPRENEURIAL IQ I have been reading a lot of what leading entrepreneurs have to say, and a fair amount of it is risibly inane. "I'm a deep thinker," Ted Turner says. "I have traveled all over. I have more access to information than anyone on the planet." In addition to non sequiturs, Turner also shows a facility for broad claims unsubstantiated by evidence. Discussing global warming on the Larry King show, Turner resorted to everyday experience to prove his point. "Haven't you been outside lately? It's hotter than hell out there. The polar ice caps are melting. I got an island and I know the ocean is rising because I watched my beach get washed away." Poorly paid logicians are tearing out their hair, while Turner basks in fame and riches. Bill Gates is routinely described as a genius, yet outside the field of software when has the man said a single thing that is interesting, insightful, or provoked the reaction, "I wish I had thought of that"? Gates himself acknowledges that the only topic he is an expert on is "making great software," yet people are always pressing him for wisdom on other topics. The moral of the story is that tech tycoons, like athletes and film stars, should only be regarded as authorities in their particular sphere of expertise. So what is it that people like Gates and Turner do that the rest of us don't? What is this thing called Entrepreneurial IQ? It's not synonymous with regular IQ. Some entrepreneurs, to be sure, have plenty of both. Venture capitalist Vinod Khosla says he got the idea for making big investments in telecommunications startups in the mid-'90s. "I remember being on vacation in April 1995, lying on the beach in Hawaii, reading about the physics of optical communications." An odd fellow. But no doubt a high-IQ one. Still, Khosla isn't typical. Henry Rosovsky, longtime dean of the Faculty of Arts and Sciences at Harvard, liked to say that Harvard's policy was to retain its A students to get graduate degrees and become professors; its B students it would send back to the business world to run the nation's enterprises. And personally I have no doubt that academics with Ph.D.s have, on average, higher IQs than entrepreneurs. Indeed, one reason so many of them resent entrepreneurs, I am convinced, is that they know they are smarter and yet they must manage on $80,000 salaries while some fat Rotarian with a gold chain on his chest pulls in $1.4 million a year selling term life insurance. This doesn't mean that academic hostility to capitalism is purely the product of envy. It also springs from a wounded sense that capitalism produces a society in which the most deserving (i.e., the most intelligent) don't get the biggest rewards. The people who get the biggest rewards seem to operate with a very different set of skills than academics. Entrepreneurs move fast; in the academic world speed is considered a sign of superficiality. "It took me just three months to write my book on the French Revolution," to professors, signals a book not worth reading. Entrepreneurs take a lot of risk, looking to the prospect of gain; academics are famously cautious, calculating what they stand to lose. Entrepreneurs are gregarious and typically have the Illustration: S.B. capacity to build teams and motivate others. These qualities are Whitehead rare in the academic world, where achievement is usually the result of individual excellence. But if there is a single trait that most distinguishes entrepreneurs from others, it is this: They have an uncanny ability to anticipate and supply what large numbers of people want. For them, opportunities aren't given, they are created. If there is a central entrepreneurial skill it is the ability to see a problem where other people see only inevitability or one of life's necessary inconveniences. As inventor and entrepreneur David Levy described his modus operandi to the New Yorker , "When I lie in bed, I try to think of things that suck." Here's how Akio Morita, the legendary founder of Sony, got his idea for the Sony Walkman. He would go to the beach with his children, and the kids and their friends would listen to high-volume boomboxes from morning to evening. Morita asked himself, "Why should I have to listen to this ghastly music?" And further, "Why should they have to carry those cumbersome boomboxes?" Morita told his engineers to figure out a way to build a small radio and cassette player that would sound like a high-quality car stereo and yet could be attached to a person's head. They obliged, and the Sony Walkman stormed the market. Morita illustrates the "supply side" truth that truly novel ideas never emerge as a direct response to consumer demand. No one was asking for little radios that they could attach to their heads. Morita intuited that something like that would be useful and desirable, and he produced it. The intelligence of the entrepreneur mainly reveals itself as insight into what consumers are likely to want in the future, and how those wants are best going to be supplied. In the mid-1980s Scott McNealy, Bill Joy, and a team of computer scientists at Sun Microsystems came up with the slogan, "The network is the computer." No one, not even forward-looking computer geeks, had any idea what they were talking about. The insight of the Sun team was that a single computer on a desk is a mere word-processing, number- crunching machine. But when computers throughout the society can communicate with each other, forming a single network, then we have a transformational technology on our hands. The Internet, which only became a mainstream phenomenon in 1995, vindicated the Sun team's insight. The company suddenly found itself at the epicenter of the Internet revolution. The enormous rewards that McNealy and others at Sun have harvested are directly attributable to figuring out where the computer was really going to make a difference in people's lives and in building products that made that vision a reality. Mark Cuban and Todd Wagner, the co-founders of Broadcast.com, got their startup concept at Indiana University. The two basketball fans figured the Internet would be a great way to listen to games all over the country, since radio typically aired local games. So they founded a company called Audionet and then renamed it Broadcast.com when online video made it possible not only to hear but also to watch sports events online. Today Broadcast.com enables viewers to use the Internet to watch virtually every college and pro team play various sports on hundreds of TV stations and cable networks. WHAT DOES LUCK HAVE TO DO WITH IT?? Amy Dean, head of the Silicon Valley office of the AFL-CIO, alleges that success in the New Economy is mainly the result of people "being in the right place and winning the lottery." Is she right? Consider what Richard Santulli does for a living. A graduate of the Polytechnic Institute of Brooklyn and a former math teacher, Santulli says he spent lots of time in his formative years playing around with math problems. "All my friends would spend hours on history and philosophy. To me, I hate to say it, math was the easy way out." Santulli got a job at Goldman Sachs and put his math skills to use doing computer analysis of companies. Then he became interested in airplanes. He knew that owning a jet made no financial sense for most people unless they flew hundreds of hours a year. Yet he guessed that lots of corporate executives and other busy and well-off people would love to have their own plane to fly around when they wanted. There was the dilemma: How to supply them with a plane just at the time they called for one? Using his math skills, Santulli figured out how fractional ownership could work. "I knew that if we could come up with a way to share the cost and at the same time guarantee service, we would hit a home run." And he did. In 1986 Santulli launched his company Executive Jet which was subsequently acquired by Warren Buffett's Berkshire Hathaway company, making Santulli a centimillionaire. Is luck a factor here? In Santulli's case, one cannot put down the market's favorable reception of his fractional jet ownership concept to mere good fortune. Santulli deserves credit for anticipating and then figuring out an ingenious way to meet the wants of a small but high-end group of consumers. Still, Santulli describes himself as a very lucky man, as do many successful entrepreneurs. Asked to explain his extraordinary success, John Chambers, CEO of Cisco Systems, says, "There's no substitute for being in the right industry at the right time." Jeff Bezos credits luck as a "huge" factor in the success of Amazon.com. Here's why these men are being truthful. Imagine a Richard Santulli figure in the year 1910. He has these incredible math skills. He can perform amazing gymnastics with numbers. But what can he do with that skill? In 1910, virtually nothing. He can impress his friends by calculating probabilities on a gambling spree, perhaps. But not much else. So our math whiz becomes a high school teacher in his home town. Today, however, those same math skills are in incredible demand. Suddenly a talent that was once nearly worthless becomes, in the electronic era, very valuable to high-growth companies. Now, if you can figure out a way, like Santulli, to put math skills to work, you too can become a centimillionaire. The comedian Jerry Seinfeld recently made the same point. "I just had the good fortune of being in this culture when there was a market for nice, funny guys." Notice that Seinfeld is not saying that he isn't talented. No doubt he finds himself extremely amusing. His point, however, is that in another cultural context there may have been very limited demand for his brand of humor. In a different milieu, say the frat boy culture of an earlier era, it is easy to see the prevailing ethic as one not of applauding, but of beating the crap out of, guys like Jerry Seinfeld. DESIGNING A FAIR SOCIETY Investment whiz Warren Buffet has outlined his mechanism for designing a fair and equitable society. "Let's say that it was 24 hours before you were born, and a genie appeared and said, 'What I'm going to do is let you set the rules of the society into which you will be born. You can set the economic rules and the social rules, and whatever rules you set will apply during your lifetime and your children's lifetimes.' And you'll say, 'Well, that's nice, but what's the catch?' And the genie says, 'Here's the catch. You don't know if you're going to be born rich or poor, white or black, male or female, able-bodied or infirm, intelligent or retarded.' "Now," Buffett asked his audience, "what rules do you want to have?" It seems that the sage of Omaha has been doing some truly hard thinking about our social problems--calling into question my low estimation of the intellectual sophistication of entrepreneurs--until I inform you that he has lifted his paradigm directly from the philosopher John Rawls. (But let's at least give Buffett credit for reading John Rawls.) In his classic treatise A Theory of Justice , first published in 1971, Rawls asks us to construct the rules for a just society by standing, as it were, behind a "veil of ignorance." Rawls' conditions are pretty much the same as Buffett's, but his argument is much more deeply conceived, so it is to his analysis that I now turn. The radical premise of Rawls' thought--the reason we are even talking about genies and veils of ignorance--is that he considers all the qualities that are normally described as merit to be actually the product of pure luck. What does he mean by this? Consider two examples, Tiger Woods and Albert Einstein. Woods has marvelous athletic talents, to be sure. But how did he get them? He inherited his basic physique, thus prevailing in the genetic lottery. No doubt he works hard and practices a lot, but what is the source of those skills? Probably they were socialized into him at an early age. So in this analysis Woods deserves no personal credit for his work ethic; those habits too are part of his social inheritance. And the same applies equally to Einstein, who had the good fortune to be born intellectually gifted and curious. Rawls holds that all success is the product of "accidents of natural endowment and the contingencies of social circumstance" and these are "arbitrary from a moral point of view." From this premise Rawls concludes that people have no automatic right to the fame or money generated by their labor. In this view, markets may be efficient, but they are profoundly unfair. So the free society is, for Rawls, an unjust society. Rawls does not, however, call for absolute egalitarianism, a division of social resources into precisely equal shares, because he recognizes that such a measure would inhibit growth and make everyone worse off. So what is Rawls' solution? He assumes that if people have greater abilities, the fruit of those abilities should be used for the common advantage. Choosing from behind the "veil of ignorance," Rawls contends that the basic structure of society should be designed in such a way that inequalities of wealth are only permitted when they serve the interests of the disadvantaged members of the population. The problem with his argument is that it defines luck so broadly that we cannot make valid distinctions between the ways that people acquire wealth. For example, the vast majority of today's tech tycoons used their creativity and skills to produce products for which they have been amply rewarded. Yet their children will acquire their vast fortunes without having contributed a single ounce of effort. Clearly the moral case for allowing an entrepreneur to keep his billions is vastly stronger than that for allowing his offspring to inherit it. Rawls, however, makes no such distinction. He assumes that both are equally undeserving, just as he assumes that all poor people, no matter how lazy or irresponsible they are, do not deserve their fate. But what about luck? Rawls' premise is that people have no right to the fruits of their luck, but this remains to be demonstrated. Consider the most obvious example of luck, the lottery. Everyone invests a dollar and one guy ends up with $10 million. His selection is the result of pure chance, yet hardly anyone jumps up and says, "Hey, I don't have the lucky number, but that guy has a moral duty to share his winnings with me. After all, what did he do to earn the money?" Most people accept that even if the winner did absolutely nothing to deserve the money, he or she is still entitled to it. Sure, it was luck, but luck happened to be winking in his direction that day. He may not have a moral right to the winnings, but even less does anyone else have any moral claim upon them. Therefore, for all practical purposes, the guy with the lucky number rightfully deserves the jackpot. So Rawls is wrong about luck. It does not give the unlucky a license to seize the possessions of the lottery winner. And let me advance it as a general truth that wealth obtained by confiscation is bad and should be deplored; wealth obtained by luck or lottery is morally indifferent and should be tolerated; and wealth that is earned rightfully belongs to the wealth creator. But there is a deeper truth to Rawls' argument. What he is saying is that we have to try and design a social system in which winners and losers can live together. The winners can't win so big and the losers lose so much that the latter group gives up on the system or conspires to destroy it. How then do the winners obtain the consent of the losers for a system in which they come out so far ahead? To ask this is to move the question from the traditional "left-wing" concern about egalitarianism to the traditional "right wing" concern about social stability. Although there's plenty of inequality today, income differences for the most part have not produced serious instability or conflict in any capitalist society. Modern capitalist countries are divided over ethnicity, nationality, language, religion, and other such factors, but they are seldom torn apart by class warfare between the rich and the poor. The main reason, I believe, is that technological capitalism is a powerful catalyst of enduring equality among citizens. THE HOPEFUL LONG VIEW The key to understanding how this is possible is to take a long-term view. Rawls himself encourages this. "The appropriate expectation" for his vision of social justice, he writes, is "that of the long-term prospects of the least favored extending over future generations." Seen from this historically enlarged perspective, the effects of technological capitalism appear in a new light. Consider a few examples. A century ago a rich man traveled by horse and carriage, while the poor man traveled by foot. Today the rich man might drive a Jaguar, and his poorer counterpart a Toyota Camry. A Jaguar is faster and more luxurious than a Camry, but still, there has been an enormous leveling of difference between the rich man and the poor man in terms of getting from here to there. A hundred years ago the life expectancy of the average American was around 47 years. The gap between rich and poor Americans was considerable: about 10 years. It was not uncommon for a wealthy person to live into his late 60s or 70s, but quite rare for a poor man or woman to do so. Today the life expectancy in the United States is around 76 years, with the gap between rich and poor a negligible 2-3 years. And this increase in longevity has occurred in the poorer nations as well. At the beginning of this century, a typical child born into a poor family in India had only a 50 percent chance of making it to adulthood. Now the vast majority of children conceived in Asia, Africa, and Latin America have the chance to experience the full range of human experience from infancy to old age. Technological capitalism deserves the main credit for this achievement, because it has produced advances in medicine and food production, as well as countless other amenities, and brought them to the lives of ordinary citizens. (Let's be fair: Government policies have also helped, by providing adequate nutrition and medical care for the poor.) Economist Joseph Schumpeter made this point in a general way when he wrote, "Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort." In 1915 it cost $20 to make a long-distance phone call from New York to San Francisco. No ordinary citizen could afford that, yet someone had to make phone calls at that price, or else there would be no market for telephone service. In footing the initially high bill, the rich paid the fixed cost of bringing long-distance service to the masses. Today a three- minute coast-to-coast phone call costs almost nothing. In 1984 it cost $3,995 to buy an IBM personal computer and $4,195 for a cellular car phone. Ridiculous prices. But as economists Michael Cox and Richard Alm point out, by buying computers and cell phones at those rates, the rich provided the cash flow that allowed those products to be made better and cheaper. Now, ordinary citizens and even the poor can afford them. The same is true with new medical technologies, which are so outrageously expensive only the affluent can pay for them. This seems horribly unfair, because the rich have access to medical benefits that others don't, but what is often forgotten is that by paying the heavy initial freight, the rich bear the cost of research and development that enables those treatments to cost much less and reach a mass market over a period of time. Time, then, is our problem. The egalitarian benefits of technological capitalism are only achieved in the long run; in the short term, society must often contend with large and in some cases rising economic inequality. There is no doubt that money is important, and the less money you have, the more important it is. The good news for egalitarians is that while money produces enormous benefits for those moving from the bottom to the top, it produces rapidly diminishing marginal returns after that point. HOW MUCH IS ENOUGH? William K. Vanderbilt, who was worth close to $200 million, liked to say that the fellow who had $1 million lived just as well as he did. Apart from fame, it is hard to see a big difference today between people who are worth $10 million, $50 million, or $500 million. Once you can afford to dress well, live in a large and lovely home, eat in good restaurants, and buy nice things when you feel like it, more money ceases to be crucial. Don't misunderstand me, more is better. My point is simply that although added increments of money do provide increased satisfaction, they do so at a diminishing rate. Why, then, do people who have a great deal of money--"enough" by all reasonable estimations--continue to chase after money? Adam Smith was intrigued by this question, and he offered a simple answer. There are strange and slightly pitiable people who don't know the meaning of "enough." And so they keep chasing one opportunity after another, they serve those whom they hate, they are obsequious to those whom they despise, and yet they keep at it, hoping to reach top dog, awaiting a tranquillity that never comes. In other words, the sad relentless engine of human discontent continues to drive the hugely successful to become even more successful. To test Smith's theory, I asked Jim Barksdale, former CEO of Netscape and now head of the Barksdale Group, what kept him going long past the point where money could make any difference in his life. "I am very conscious of coming from the South," Barksdale said. "I know that people laugh at the Southern accent. I know of many successful people with hardscrabble backgrounds. Many of us are driven to overcome what we came from." Ted Turner has attributed his relentless ambition to a "latent inferiority complex" based on his childhood inability to satisfy a demanding father. Several years ago, in the middle of a speech, Turner held up a business magazine with his face on the cover and called out, "Is this enough for you, Dad?" In Michael Lewis' biographical sketch of Jim Clark, who has founded three billion-dollar companies, the author explores the question of how much money Clark needs to be happy. At first, he discovers, Clark wanted to have $10 million. When Clark reached that goal, he raised it to $100 million. Then he set his sights even higher. "I just want to have a billion dollars." Lewis pushed him: "What happens after you have more money than Larry Ellison? Would you like to have more money than, say, Bill Gates?" Clark dismissed this as a ridiculous idea, but a few minutes later, he confessed, "You know, just for one moment, I would kind of like to have the most." The contest to better everyone else, to accumulate the largest pile of money, remains the primitive drive behind the inexhaustible energies of our entrepreneurial elite. In other words, although the gratification of spending is subject to diminishing marginal returns, the gratification of accumulation is not. And Adam Smith concludes, "It is well that nature imposes on us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind." Short-term inequality remains a problem, but is it a problem we can live with? I believe it is, on this condition: We should try to make sure that the gains of the successful are not accompanied by losses on the part of the less successful, "I win, you lose." We should strive for an economy where the rich are getting richer, and the poor are also getting richer, "I win, you win." This condition, in which all the social classes are gaining, even if not at the same rate, has not always been realized, but it is being generally satisfied in today's American economy. Inequality is not a virtue, but it is an inevitable byproduct of a free society that seeks to reward citizens in proportion to their productive worth. Still, even short-term inequalities of a certain magnitude continue to disturb the social conscience, and they should. Over time, more and more ordinary citizens will move from the lower ranks to relative affluence. Eventually, they too will find themselves in a position where they can do what they want with the rest of their lives. Thus they will have crossed the point where money produces diminishing marginal gains. At this juncture we can all consider ourselves winners in the lottery of success, and the issue of inequality might cease to matter. This article is adapted from The Virtue of Prosperity: Finding Values in an Age of Techno-Affluence, published by Free Press in November, 2000. Dinesh D'Souza is a research scholar at the American Enterprise Institute. He can be reached at email@example.com.